Buying to Sell: A Theory of Buyouts

44 Pages Posted: 22 Mar 2010

See all articles by Pehr-Johan Norbäck

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN)

Lars Persson

Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)

Joacim Tåg

Research Institute of Industrial Economics (IFN)

Multiple version iconThere are 4 versions of this paper

Date Written: March 12, 2010

Abstract

Private equity backed firms have more leverage, more intense compensation contracts, and higher productivity than comparable non-private equity backed firms. We develop a theory of buyouts in oligopolistic markets that ties these facts to an explicit focus on buying assets with the intent of selling them. Private equity backed firms are better governed and are more aggressive in restructuring compared to incumbents since their owners maximize a trade sale price. The equilibrium trade sale price increases in restructuring intensity not only by increasing the profit of the acquirer, but also by decreasing the profits of non-acquiring firms. Predictions on the exit mode and on when private equity firms can outbid incumbents in the market for corporate control are also derived.

Keywords: Acquisitions, Buyouts, Buy-to-sell, Buy-to-keep, Leveraged Buyouts, Private equity, Take-overs, Temporary ownership

JEL Classification: G24, G32, G34, L1, L2

Suggested Citation

Norbäck, Pehr-Johan and Persson, Lars and Tåg, Joacim, Buying to Sell: A Theory of Buyouts (March 12, 2010). Available at SSRN: https://ssrn.com/abstract=1569392 or http://dx.doi.org/10.2139/ssrn.1569392

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Lars Persson

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Joacim Tåg (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

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